Why Big Pharma's 2010 Looks Challenging

The stagnant economy may finally catch up to it.

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While the recession has been top of mind for most industries, it has yet to have a major affect on the health care arena. Internal issues like patent expirations and the shift to biologics have had a greater impact on the shape of the industry in 2009, but economic factors may finally catch up to Big Pharma in 2010.

According to a report issued Thursday by the US Census Bureau, revenue in the health care sector increased 5.7% in 2008 to $1.75 trillion from $1.66 trillion in 2007. Economists expect the health sector to continue growing at a rate of 5.5% in 2009, even as GDP is expected to drop 0.2%.

"In spite of only small increases in some industries over the past year, the health care sector continues to represent a sizable portion of our economy," said Mark Wallace, chief of the Census Bureau's Service Sector Statistics Division. "At $1.75 trillion, this sector made up 30% of the service sector in 2008, which itself represented about 55% of the economic activity in the United States."

But healthy growth on the top line doesn't mean that the industry hasn't seen its share of upheaval this year.

Big Pharma has done some major consolidation with the acquisitions of Wyeth by Pfizer (PFE), Genentech by Roche (RHHBY), and the merger of Merck (MRK) and Schering-Plough.

Eli Lilly (LLY) and Bristol-Myers Squibb (BMY) have done their share of smaller acquisitions as well in an effort to diversify their product base before their major blockbusters face generic competition.

Yet, according to a report released by PricewaterhouseCoopers' Health Research Institute, 2010 will shape up to be an even more tumultuous year for the industry.

"Health care typically lags trends in the business cycle by a year or more. While flat may be the new growth for other sectors of the US economy, the recession could hit health care in 2010," said David Chin, M.D., partner and leader of PricewaterhouseCoopers' Health Research Institute.

PwC predicts some major cost-cutting will be in order for the industry to stay competitive in the new environment of health care reform, a stagnant economy, and more government oversight.

"The primary emphasis for all health care organizations in the year ahead will be on reducing costs and creating greater value in the health system, a focus that will have a domino effect from one sector to another and redefine roles, responsibilities, and relationships," Chin added.

Some of the major trends that PwC predicts have already begun to take shape, including a crack-down on fraud and mistakes within the industry. (See also, Big Pharma's Sick Ad Budgets)

This past year, Big Pharma has been paying its dues for off-label marketing of products to doctors. Pfizer shelled out $2.3 billion for its violations, while Eli Lilly forked over $1.4 billion for similar indiscretions. PwC sees the trend being even more prominent as the decade blooms now that pharmaceutical executives can face jailtime for the offenses.

PwC reports that health reform is banking on as much as $1.6 billion in savings from health-care fraud prevention and recovery "to bend the curve on cost growth." Meanwhile, the government has upped its budget for fraud and abuse budget by 50%, with a large portion going to enforcement and prosecution.

Big Pharma wasn't the only culprit of fraud in 2009; WellPoint (WLP) got a slap on the wrist from the US Centers for Medicare and Medicaid Services in January for the mishandling of Medicare enrollment.

Another major trend that will play an even more prominent role in the upcoming year is the attention to public health and the potential for outbreaks. This was highlighted in 2009 when the US government got an "F" for preparedness when it came to the H1N1 Swine flu vaccine. Companies like Novartis (NVO) and GlaxoSmithKline (GSK) scrambled to make enough doses, but couldn't keep up with demand from consumers worried the disease would spread through their children's schools like wildfire.

But cost-cutting will likely still be the biggest challenge for the health care sector in 2010.

The pharmaceutical industry in particular has already been slashing staff left and right to make up for redundant costs. According to the staffing firm Challenger, Gray and Christmas, 58,696 pharmaceutical and biotech jobs were cut through the end of October 2009. This included 19,500 staffers at Pfizer who overlapped with the Wyeth staff, 16,000 workers at Merck who had a similar Schering-Plough counterpart, and 8,900 at Johnson & Johnson (JNJ) as part of a plan to save $1.7 billion in annual expenses by 2011.What ETF returned subscribers to our Grail ETF & Equity Investor newsletter 22% in just one month? Find out with your FREE trial and don't miss the next big trade.

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